How Much Is Onyx Pharmaceuticals Really Worth?

How Much Is Onyx Pharmaceuticals Really Worth?

Onyx Pharmaceuticals is having a garage sale, but it doesn't appear that Amgen has been invited.

The promising cancer developer confirmed over the weekend that Amgen had made an offer to acquire Onyx for $120 per share, a 38.2% premium above Friday's close. Onyx certainly didn't waste any time rejecting the bid, commenting that it "significantly undervalued Onyx and its prospects, and was not in the best interest of Onyx or its shareholders." That hasn't, however, stopped Onyx from actively engaging in additional acquisition chatter with other interested parties outside of Amgen.

The interest in Onyx will come down to two big questions: How much is it worth considering that it only receives a percentage of net sales on two of its three cancer drugs? And who might the buyer be?

How Onyx makes its money
The first question, as I've noted, is quite tricky.

Nexavar, the company's most mature cancer drug, is currently approved by the Food and Drug Administration to treat the most common forms of kidney and liver cancer. Aside from Japan, though, it splits the profits of Nexavar with licensing partner Bayer down the middle. There's also a strong possibility that Nexavar could be in line for an added indication in treating thyroid cancer based on the extended progression-free survival it delivered relative to the placebo in a late-stage trial.

Onyx's piece of the pie gets even smaller if you take a closer look at Stivarga, a cancer drug approved by the FDA to treat advanced colorectal cancer and gastrointestinal stromal tumors. Since Stivarga was actually developed by Bayer and licensed to Onyx, it receives just 20% of net sales.

The third and final FDA-approved drug is Kyprolis, a multiple myeloma drug that was approved in 2012 to treat patients that has failed to respond, or stopped responding to, two previous lines of treatment. Aside from a partnership in Japan with Ono Pharmaceutical, Kyprolis is all Onyx's!

The sum of Onyx's parts
There aren't many peak sales estimates on the Street with regard to Nexavar, mainly because it received its first FDA approval in 2005. In my estimate, if it were to gain the indication for thyroid cancer, it may top out, with slow but steady growth, around $1.3 billion to $1.4 billion annually.

Stivarga peak sale estimates are a lot easier to find with Bayer guiding to sales in excess of $1 billion assuming it gains all indications.

Finally, there are sales of Kyprolis, which offer the greatest potential. According to Deutsche Bank analyst Robin Karnauskas, Kyprolis has the potential to deliver $3 billion in peak sales -- not bad for a drug wholly owned by Onyx.

There's also Onyx's experimental pipeline, which needs to be taken into account. Pfizer's palbociclib, for instance, is a revolutionary breast cancer drug that recently received the breakthrough therapy designation from the FDA after positive mid-stage trial results. Onyx, should palbociclib be approved, would receive an 8% royalty on net sales.

We should also consider that Onyx ended the most recent quarter with $553 million in net cash.

What's Onyx really worth?
The way I see, if the stars were to align properly, Onyx could have a peak revenue potential on all drugs of around $4 billion to $4.2 billion annually. Understandably this is a utopian estimate based on the above peak sales figures and assumes that all drugs in its pipeline gain every indication imaginable at essentially the same time, which we know from history is very unlikely.

What this really comes down to is what sort of multiple Onyx can command. In recent years, it hasn't been uncommon to see buyers pay upward of two to three times peak revenue estimates for a company. Perhaps the best example of an overzealous bidder came last year when Bristol-Myers Squibb and AstraZeneca combined forces to purchase diabetes drug maker Amylin Pharmaceuticals for $7 billion. At the time, peak sales estimates for its lead drug, Bydureon, were only $1.5 billion. In 2011, Amylin only produced $651 million in revenue, so you can definitely say that the pair of Bristol and AstraZeneca paid through the nose for Amylin.

With Onyx, you get quite a bit of cancer-focused potential, but you also have a shared royalty stream and the potential for increasing competition -- especially in colorectal cancer and multiple myeloma. All said, I could foresee Onyx going for 2.5 times peak sales plus its $553 million in cash, or, in my best estimates, what amounts to roughly $145 per share.

Who might be the buyer?
I'm not certain we'll see a buyer step up so shortly after Amgen's offer, but the most logical choice to me seems like Bayer.

Bayer has been on an acquisition tear recently, purchasing birth-control device maker Conceptus for $1.1 billion in April and vitamin maker Schiff for $1.2 billion in late October, presumably to expand existing market share and boost its U.S. presence. Swooping in and gobbling up Onyx would secure its remaining Stivarga stake, the entirety of the Nexavar stake (which would be great if it gained additional indications) and net it $553 million in cash!

It remains to be seen how Onyx's negotiations will unfold, but I'd certainly say that there is a chance of additional upside in shares based on my crude calculations. Onyx has a promising array of cancer-fighting drugs and plenty of solid licensing partnerships that would be conducive of ongoing sales growth. If anything, Onyx should be firmly planted on your watchlist moving forward.

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